policy

Tax Changes May Be Coming – The Inflation Reduction Act of 2022

Hey dear readers! I hadn’t planned to post anything else this week, but when there’s breaking news, I have to share it!

I recently learned that the Inflation Reduction Act of 2022 is gaining traction, and Senators Chuck Shumer and Charles Manchin reached an agreement on the terms of this bill. That is exciting news, considering how Manchin had originally pushed for limited terms. Manchin’s decision to back the bill – without limiting it to the areas of concern, namely, pharmaceutical prices and continued health care subsidization – was unexpected, but an exciting turn that means this bill will be moving forward sooner than expected.

For those that are curious, there are tax implications in this bill (I mean, why else would I be posting about it?). For starters, $124 billion is set aside to fund increased tax enforcement. This means that, if the bill is passed, there will be enhanced enforcement, starting with a little over $3 billion for taxpayer services, $45.6 billion for enforcement (think revenue agents and officers, auditors and specialists, attorneys, and appeals unit employees and resources to support all of the functions), $25 billion for operations support (the other employees that work behind the scenes outside of the enforcement functions), and $4.75 billion for business systems modernization, among other things. The funding is designed to cover 10 years, so the financial gravity of these provisions can be staggered over time.

For taxpayers (individuals) this means that IRS may be getting more help in the months and years to come (the bill provides for more “direct hire authority” capabilities, meaning faster hires). This also means that the previous weakened collection and enforcement function will be beefed up, so the scams and schemes that may have slipped through the cracks before may be identified and examined faster and more efficiently (in other words, wrap up your scams now, if you have some!) For tax practitioners, prepare for more clients that want to clean up their tax records before the enforcement units have the staff and resources to pursue collections on more individuals. There is also an opportunity to offer modernization services and products once various IRS contracts become available.

Now, the bill, as it’s written, indicates that the increased funding isn’t designed to target anyone that earns less than $400,000 annually. However, I think that some taxpayers that earn under the $400K amount may end up getting caught up in the random audits, especially when the more specialized agents and officers are hired and assigned to higher dollar cases, freeing up the overall caseload for less technical (but still effective) specialists and auditors. This will all take a bit of time, of course, but it’s something to look for on the horizon.

The other tax implication discussed in this bill is enforcing a minimum corporate tax of 15% for companies that have over $1 billion in profits. The actual corporate tax rate is a statutory 21%, but these highly profitable companies often pay far less than the proposed 15% amount, because they have the best attorneys and accountants that exploit all of the loopholes currently in the tax code (which is EXACTLY what good practitioners are supposed to do on behalf of their clients, and within the confines of the law). With these new proposals, corporations that qualify will have to pay no less than 15% tax on profits. According to the bill, the minimum corporate tax rate would go into effect after December 31, 2022.

This may sound like a groundbreaking move, but to be clear, the minimum corporate tax rate was a standard issued by the OECD at the last G20 summit (October 2021), and already standard tax practice in multiple other countries. The 15% minimum rate was proposed as part of the two-pillar plan to address digital economies and the tax avoidance that is prevalent in that realm. This segment of the Inflation Reduction Act of 2022 is simply mirroring the accepted standards already in place in other OECD member countries.

Also, the minimum corporate tax rate would only affect 200 companies. So the targeted parties are small in number but account for billions of dollars in the economy. For this reason, there is already criticism from some representatives, regarding the fact that this could affect jobs. Indeed, billion-dollar companies usually employ a lot of people, so there is a possibility that the workforce may be affected. Time will tell what the overall effect will be once the most profitable companies are forced to fork over a minimum amount of their earnings.

Whew, that’s it for today! I hope this got you all caught up on the latest tax happenings, and I’ll be sure to share more of my thoughts as the situation develops. Take care, and I’ll talk to you all soon!

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Articles reviewed: Yahoo, OECD, Business Insider